1 Time value of money

Question 1

What is the interest rate?

Answer 1

The interest rate is the price paid to use money for a period of time.

Lenders pay interest due to the positive time value of money

They are meant to compensate lenders and savers for fogegoing the use of money for some interval of time.

Question 2

What is the rate of return of an investment?

Answer 2

It is the profit as a proportion of the initial outlay.

Question 3

What is the opportunity cost of capital?

Answer 3

It is the expected return that an investor gives up when choosing to finance a project rather than investing on the stock market

Question 4

What is the time value of money?

Answer 4

The time value of money reffers to the difference in value that money hold at different periods of time.

Question 5

What are some reasons money is worth less in the future?

Answer 5

• inflation
• uncertainty of future investments due to the risk of default
• people preffer to spend their money now rather than in the future
• opportunity cost

Question 6

What is the future value of an investment?

Answer 6

It is the value that an initial investment will have in the future

Question 7

What is the present value of an investment?

Answer 7

It is the value that a future investment had at the begining

Question 8

What is the discount rate composed of?

Answer 8

• The risk free rate
• The risk premium